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Don't Trust Bernie Madoff! Invest in What You Know

NEW YORK (TheStreet) -- The bull market for 2013 was a powerful endorsement for blue chip stocks. Then convicted con man Bernie Madoff re-emerged in the news. The specter of Madoff presents another compelling reason for individual investors to buy publicly traded companies that pay dividends with a history of growth, such as Procter & Gamble (PG), Kimberly-Clark (KMB) and McDonald's (MCD).

Madoff is back again in the media eye due to the penalty of $2 billion that J.P. Morgan (JPM) has to pay to regulators and to his victims. J.P. Morgan was Madoff's primary banker for two decades. It grossly neglected its fiduciary duties in that role. Madoff predicted in an interview in 2011 with the Financial Times that J.P. Morgan would be heavily fined as there were "people at the bank who knew what was going on."

While Madoff was a terrible investor, he was a master at manipulating the financial system and the psyche of his victims. He perpetrated a $65 billion Ponzi scheme.

Allan Stanford, another convicted con man, is now serving time behind bars like Madoff. Stanford used to prey on the greed of his victims by promising high returns. He stole $7 billion. By contrast, Madoff promised slow, steady gains so as not to arouse suspicions.

Both crooks illustrate why investors should buy stocks with a history of increasing dividends for shareholders.

There is no shortage of con artists looking to use the securities markets to take the money of the investing public, both foreign and domestic.

Many publicly traded companies based in China have been found to be fraudulent operations. As detailed in a previous article on TheStreet, Caterpillar (CAT), the world's largest heavy equipment maker and a member of the Dow Jones Industrials Average, had to write down $580 million in 2013 as a result of "deliberate, multiyear, coordinated accounting misconduct" at Siwei, a mining equipment company it bought the year before.

But shareholders have some protection in McDonald's, Kimberly-Clark and Procter & Gamble due to two important principles of investing.

The first is the sage counsel from legendary investor Peter Lynch. Invest in the companies that are doing well in the neighborhood.

Lynch posted an annual return of over 29% from 1977 to 1990 as head of the Fidelity Magellan mutual fund (FMAGX). He contended that consumers had an advantage over the investment community, as they could see what was selling at the local mall. Who else knows better what the consumer wants than the individual making the purchase? That concept provided the basis for his books One Up on Wall Street and Beat the Street.

Stock quotes in this article: PG, KMB, MCD, JPM, CAT, FMAGX 

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